In our last article, we discussed the different ways Utah HOAs and condominium associations can fund major repairs, including operating funds, reserves, and special assessments. When a board determines that a special assessment is necessary, two important questions usually follow:

1. How do we make sure the assessment is legally valid?
2. Can we fund the project now without requiring every owner to come up with a large lump sum payment immediately?

The answers to those questions depend on Utah law and the association’s governing documents. The declaration and bylaws may determine whether the board can approve the assessment on its own or whether an owner vote is required. The governing documents and Utah law also impose specific requirements for notice, voting, allocation of the assessment, and payment. For larger projects, an association loan can also be a useful tool. When structured properly, a loan can allow the association to complete needed work promptly while giving owners who need additional time the ability to pay their assessments over a longer period.

But both pieces need to be done correctly. An improperly authorized assessment can create collection and enforcement problems. Poorly negotiated loan documents can also give a lender rights that are unnecessarily broad or require the board to make commitments that exceed its authority under the governing documents.

Making Sure the Special Assessment Is Properly Authorized

Before imposing a significant special assessment, the board should answer several basic questions such as:

1. Does the board have authority to approve the assessment, or is an owner vote required?
2. How must the assessment be allocated among the owners?
3. Are there limits on the amount, timing, or purpose of the assessment?
4. 4. What meeting, notice, and voting procedures apply?

Some governing documents allow the board to impose a special assessment without an owner vote. Others require owner approval, particularly for assessments above a certain amount or for particular types of expenses. The board should also verify how the cost must be divided. An equal division among lots or units may seem fair, but the declaration may require the expense to be allocated according to ownership interests, percentages, unit types, or another formula.

Utah law also imposes requirements concerning association meetings and budgets, and the governing documents may add additional procedures. Depending on how the project is funded and the assessment is structured, those requirements may need to be considered as part of the process.

For a significant assessment, clear communication with owners should begin before the assessment is approved. No owner wants to be surprised by a large, unexpected bill. The board should give owners reasonable notice of the proposed project and assessment, explain why the work is needed and how the proposed assessment will be calculated, and provide any meeting or voting information required by the governing documents or Utah law.

Once the assessment is properly approved, the board should adopt a written resolution identifying the project, the total amount being assessed, each owner’s share, payment deadlines, available payment options, and how any association financing will work. Providing clear information before the assessment is adopted, followed by clear documentation after approval, can reduce confusion, owner frustration, and disputes over the assessment.

Using an Association Loan to Give Owners More Time to Pay

One of the practical challenges with a large special assessment is that not every owner has substantial cash readily available. An association loan can sometimes make the assessment more manageable. Instead of waiting for every owner to pay the entire assessment before beginning the project, the association may borrow the funds needed to complete the work and use assessment payments to repay the loan. Owners who are able to pay their assessment in full may be permitted to do so, while owners who need additional time may be offered a longer payment schedule.

This approach can be particularly useful when repairs cannot reasonably wait but the board is concerned about the financial impact of a large assessment on individual owners. It can give owners more flexibility without forcing the association to delay necessary work while it waits for assessment payments to come in.

Before offering a payment over time option, the board should determine the following:

1. Whether owners may prepay their share.
2. How interest and financing costs will be allocated.
3. Whether owners who pay immediately can avoid some or all financing costs.
4. What happens to an unpaid assessment balance if an owner sells.
5. What happens if an owner fails to make the required payments.

The assessment documents and the loan documents should address these issues consistently.

Be Careful About What the Lender Is Asking For

A lender’s loan documents are naturally written to protect the lender. That does not mean every provision is appropriate for every association. Association loan agreements may contain restrictions affecting the association’s financial decisions for years after the loan closes. A lender may seek provisions requiring the association to maintain or increase assessments, limiting the use of reserve funds, restricting additional borrowing or expenditures, assigning assessment income, or requiring lender consent before certain financial decisions are made.

Some of those protections may be reasonable but other lender protections may go considerably further than necessary. The more important question is whether the board actually has the authority to make the promises contained in the loan documents. If the declaration requires owner approval for certain assessment decisions, for example, the board should be cautious about signing an agreement promising the lender that the board will make those decisions on its own.

That is why reviewing an association loan should involve more than comparing interest rates and repayment terms. The lender’s covenants, collateral provisions, assignment of assessment income, consent rights, default remedies, and other restrictions should be compared against the association’s governing documents before the loan is signed.

Getting It Right Before the Documents Are Signed

Special assessments are difficult for owners even when everyone agrees that the underlying project is necessary. A board is in a much stronger position when it can clearly explain why the assessment is needed, how each owner’s share was calculated, how the assessment was authorized, and what payment options are available. It is also far easier to correct a problem with a proposed assessment or negotiate an unreasonable loan provision before the assessment is imposed or the loan closes. Once the assessment has been adopted or the financing documents have been signed, the association’s options may be much more limited.

Miller Harrison works with Utah HOA and condominium boards throughout this process. We review governing documents, identify the approval procedures required for special assessments, prepare assessment resolutions and owner notices, and review and negotiate association loan documents. If your association is considering a major repair project, special assessment, or association loan, involving counsel early can help ensure that the assessment and financing are structured together, properly authorized, and clearly communicated before the board moves forward.

This article is provided for general informational purposes only and is not legal advice. The requirements applicable to a particular HOA or condominium association depend on Utah law and the association’s specific declaration, bylaws, articles, and other governing documents. Associations should consult qualified legal counsel regarding their particular circumstances.